CIC Goes Shopping in Japan, for Property

By Alison Tudor and Isabella Steger

China Investment Corp.’s most high-profile real estate investment in Japan so far is just the sovereign wealth fund’s latest move in steadily building up its property portfolio.

Agence France-Presse/Getty Images

CIC, together with Blackstone Group L.P., agreed to buy a Japanese property loan portfolio from Morgan Stanley last year for around US$1 billion, according to a person familiar with the matter.

CIC has been showing increasing interest in distressed property assets since the financial crisis, particularly in the U.S. Depressed real-estate values there have been drawing interest from foreign investors from all over, though the value of investments still pales in comparison to the pre-crisis days of 2007, when in the third quarter overseas investment peaked at $8.7 billion.

Last year CIC entered talks with Harvard University’s endowment to buy its stakes in a number of U.S.-focused real estate funds for about $500 million. That followed from commitments by CIC to invest $1 billion each in funds managed by Brookfield Asset Management and Cornerstone Real Estate Advisers, The Wall Street Journal reported.

In Japan, real-estate funds run by large investment banks made a killing when they acquired distressed assets after Japan’s asset bubble burst almost two decades ago and prices went up in Tokyo in 2007. Since then, values dropped sharply and banks looked to offload these loans. Cash-rich Asian investors came to the rescue, sharply increasing their acquisitions in 2010 – 18 compared to eight the year before – according to Dealogic data, totaling $372 million. These Asian investors and new entrants, such as Blackstone, may be paying a little more than investors during Japan’s ‘Lost Decade’ but they are taking less risk given the greater transparency into the value of the assets nowadays.

For CIC, investing in real-estate funds rather than physical assets is one way of getting exposure to the market while bypassing some of the political backlash that could follow from foreign investment in major U.S. assets. Political sensitivities between China and Japan also means this is a prudent strategy for CIC to pursue in that country.

It’s hard to quantify just how active the Chinese are in these markets, though so far there’s no sign of a spending spree like the one Japanese investors went on in the 1980′s, when they snapped up prized assets like Rockefeller Center in New York. Data from Real Capital Analytics show that the Chinese were only the 12th biggest investors in U.S. commercial real estate in 2010 up until October, but that excludes investments through funds, according to the WSJ.

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